Crony Capitalism

Study Says Foxconn Deal Cost Wisconsin $20 Billion in Lost Economic Growth

Once again, government-subsidized projects fail to deliver

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In June 2018, President Donald Trump attended the groundbreaking ceremony for a Foxconn factory in Wisconsin. Ever exuberant in his comments, he called the project the "eighth wonder of the world" and "one of the great deals, ever." Always a bragger, his praise was directed at himself for orchestrating the use of state subsidies and tax credits to bring the Taiwanese multinational electronics company to Wisconsin for it to manufacture high-resolution LCD screens.

To make this deal happen, the state legislature offered a subsidy package of $4.5 billion, mostly in direct cash payments, and lower-priced land acquired through eminent domain. In exchange, Foxconn promised to create more than 13,000 middle-class manufacturing jobs, a revived manufacturing sector and loads of tax revenue—the combination of which was projected to produce economic returns ranging from $39 billion to $78 billion over the next 15 years. If these returns sound like a great deal, you've been conned.

A year and a half after Trump paraded at the site with his golden shovel, the reality isn't as bright. First, a few days before the ceremony, Foxconn announced that the factory would ultimately be smaller than the one initially promised. It would also be highly automated, with almost all of the assembly work done by robots, and would only require 3,000 employees—90 percent of them "knowledge workers" such as engineers, programmers and designers. There's nothing wrong with such a modern factory, except that it's not what Trump and other government officials thought they were buying with taxpayers' money.

And what about the promised economic growth? Even under the deal's original terms, there's no way it would have produced much growth. That's because, as is often the case, the original projections offered by economic development consultants only considered the expected benefits from the subsidies; the costs were ignored. In the real world, however, these subsidies don't fall from the sky. Every single cent comes from additional taxes paid by actual people. When you consider these costs, the economic outlook for the project dims quite a bit.

In a recent paper on the issue, my Mercatus Center colleagues Matthew Mitchell and Michael Farren did the math and found that "the $3.6 billion in taxes needed to fund the subsidies will likely decrease Wisconsin's long-run GDP by about $20 billion over the 15-year life of the handout. And this estimate doesn't include the local utility infrastructure, and federal subsidies that total another $1.4 billion." These numbers are harder to sell to taxpayers than the la-la land ones we hear about before every big subsidy deal.

Many might have assumed that this particular deal was going to be a disaster because it was orchestrated by Trump and Scott Walker, Wisconsin's Republican governor at the time. Yes, it's true that our current president believes in economic engineering and cronyism—which is another way to describe this kind of deal. Trump has failed elsewhere when trying to spark growth with subsidies. Take, for instance, the Carrier air conditioner plant in Indianapolis, which received large state handouts under Trump's pressure, only to end up laying off hundreds of workers. But in such matters, many politicians on both sides of the aisle have a similarly lousy record.

And so, it would be a mistake to assume that this debacle is specific to Trump or to Foxconn.

A new paper in the Journal of Economic Perspectives by Cailin Slattery of Columbia University and Owen Zidar of Princeton University looks at state and local business tax incentives and finds yet again that narrow, firm-specific tax breaks aimed at attracting businesses and boosting employment aren't the way to go. The study shows that larger, more profitable companies are more likely to get bigger handouts. The largest deals benefit the recipients, according to their research, but not the overall state economy. Lower-income states also tend to be more generous with their handouts, only to jack up the cost per job created, sometimes up to as much as $400,000 per job.

This study is only one of many on the topic. They all find that these narrowly targeted subsidies don't work as advertised and are typically counterproductive. Unfortunately, a slogan like "subsidized projects aren't worth the money you pay for them" doesn't make for a great sound bite at ribbon-cutting ceremonies.

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  1. If only unreason did articles on Lefty Blue state debacles to destroy business. We might get some unbiased reporting at this shithole magazine.

    We get it wisconsin is an election battle state and the Republican governor tried to incentivize business relocation to a state ravaged by Democrat’s historically socialist policies.

    Tax breaks equal cash for unreason. We already blasted you unreason when you first tried to push this Propaganda.

    1. How about ole Cali, the 5th or 6th biggest economy in the world. Everyone laments how left it is. Compare that to Kansas, super right after Brownback.

      I mean, fair is fair.

      Or…..you could just put on your big boy pants, realize this was a complete economic failure and giveaway to a huge company (because if you hate social welfare you should probably hate corporate welfare just the same) and vow ourselves to not make the same mistake again.

      1. The difference is that we didnt like this from the beginning, and said the remedy is fewer government handouts to favored constituencies. Your side believes the remedy is more government handouts to favored constituencies.

      2. @wearingit – “How about ole Cali, the 5th or 6th biggest economy in the world.”

        Cali also has some of the most talented government leeches in the world. Forty years ago the SoCal aerospace industry was selling planes to Uncle Sam that literally cost their weight in gold and were useless within a few years of their introduction (the B-58). Even worse, they had a nasty habit of missing their design goals and being such slobs about testing that they didn’t notice (see the “Battle of Palmdale”). They were so shameless that they would even dust off failed concepts and sell them to the military all over again for an inflation-adjusted price (like the B-1, which was obsolete before it flew for the same reasons that the B-58, A-12 and SR-71 were already known to be obsolete).

        In the 80s they convinced state governments that every K-12 student needed to learn to use an Apple II (literally and urgently), and a few years later they convinced the same governments that nothing short of a graphical interface could prepare kids for the future. Instead we got a workforce that struggles with e-mail and spreadsheets. Tax-payers lost.

        In the early 2000s they conned the federal government into saving California from its own self-inflicted smog problems. (The EPA’s tighter NOx standards for diesels were based on health concerns that are only relevant to few big metro areas, most of which are in Cali. The EPAs own NOx surveys have shown that across several consecutive administrations.

        And when they’re not deliberately scamming the government and tax-payers, they’re not competitive. They managed to lose the most useful and applicable part of the space race (reaching orbit) as well as the most scientifically interesting parts (studying survivability, photographing the far side of the moon, sending probes to the inner planets). The only part they won was a publicity stunt with a scientific payload that was partly duplicated by cheaper remote spectroscopy. And the Russians weren’t far behind. Their excuse is that because Russia lacked miniaturized nuclear warheads, they had more funding for big rockets; but the Russian rocket engineers were at an across-the-board industrial disadvantage and also a kinetic disadvantage due to high latitude.

        So yeah, if you suck a trillion or so out of the federal treasury every year for half a century, you can buy a half decent state (as long as you don’t need electricity).

    2. True.

      A new paper in the Journal of Economic Perspectives by Cailin Slattery of Columbia University and Owen Zidar of Princeton University looks at state and local business tax incentives and finds yet again that narrow, firm-specific tax breaks aimed at attracting businesses and boosting employment aren’t the way to go.

      Also true — compared to BROAD tax breaks. If those are the choices, the crony “subsidies” (only the cronies being allowed to keep more of their own money) come out worse. But if the choice is between narrow, firm-specific breaks and nothing, then the narrow ones look pretty good.

      Not only that, but they can be a form of propaganda by deed. That is, in future years people can look at how well Foxconn did with an incentive, and draw from that observation the conclusion that we’d all do better with such incentives.

    3. So were you always in favor of big government spending or are you taking this position because your Dear Leader likes it?

  2. I for one cant wait for election and census 2020 to so send Lefties into an emotional tailspin that they finally turn on Bill Clinton and unreason for not being Lefty enough.

  3. They should have used the money to build a stadium, or a waterfront.

    1. Those are always sure fire, can’t lose bets.

    2. Or a bunch of farmer’s markets with condos nearby…then the hipster millennial with the disposal incomes just flock to the place.

    3. High speed rail to fight climate change.

    4. No they could have put the money into building Wisconsin businesses. Wisconsin has any number of smaller firms that could have used that money to assist them. Or existing companies that could use help adjusting to the current markets. Instead it went to this wild idea of bringing in a super company. The error the Walker Administration made is they did not look at there own state for ideas. And part of the reason for that is because the innovative ideas are coming from places like Madison which is a liberal haven.

      1. Why should the government tax existing business so they can give it back to existing business? Why not just let Wisconsin businesses keep their own money?

        1. Most states have some entity to help existing and new businesses in their state. In Wisconsin that is the Wisconsin Economic Development Corporation or WEDC. I am suggesting that WEDC was spending its time and money pursuing out of state businesses like Foxconn when it should have put the money and effort in new and existing Wisconsin businesses. Money spent either way.

          1. Let us try this again, why should the government tax existing business so they can give it back to existing business? Why not just let Wisconsin businesses keep their own money?

            1. So your suggesting that states get completely out of the game of supporting businesses in their state. No outreach to find out of state, out of country markets, no tourist department to bring in people, no promoting development. Is that your suggestion?

              1. Yes, for god’s sake quit being such a moron. How can your solution to shitty government be that we need more shitty government?

                I mean you seriously said Wisconsin should have given this money to domestic businesses and then when challenged said Wisconsin needs to tax those businesses in order to attract non-Wisconsin businesses.

              2. Is it your assertion that states can only support business by taking money from one business to give to another? You must be Paul because you sure as hell aren’t Peter.

                1. What I am saying is that it is common practice for governments at all levels local, state, federal to have agencies designated to recruiting and retaining businesses. These agencies are funded by tax payers (personal and business). I suspect that eliminating theses agencies would be almost impossible. I don’t care if they exist or don’t exist. What I am saying is that if they exist they should focus on in state businesses as a priority. WEDC did not do that when it focused on Foxconn.

    5. The new Milwaukee arena for billionaire sports ball owners was a separate Walker tax giveaway.

  4. “And so, it would be a mistake to assume that this debacle is specific to Trump or to Foxconn.” — Right…..

    So,,, just an FYI,,, this article is a “mistake” that assumes President Trump is somehow responsible for Wisconsin’s government. lol… 🙂

    1. I live in Wisconsin. The debacle is Scott Walker’s and no one else. Just because Trump showed up for a photo op does not make it his fault.

      1. Does that make Trump conned by Walker and Foxconn?

  5. If you want to make up phony numbers , then why not project them out to the year 2100 and claim it will cost Trillions?

    Why are you engaging this deceitful game of projecting numbers into a random time in the future and reporting nonsense headlines?

    1. unreason is the new Vox. Its all about clickbait now.

      1. All the real action is in the comments.

  6. There’s a difference between “pro-business” and “pro-market.” And many Republicans don’t seem to understand that. Same for some Democrats, by the way, with Obama’s bailout of GM and those stupid subsidies to Solyndra.

    Hands-on, pro-business policies are ultimately the other side of the coin of hands-on, pro-worker policies, in that they entail central authorities deciding who gets more of what and from whom in the market. And they both end up giving lackluster results for the broader economy.

    The solution to both is being pro-market, which, differently put, means: Stay out of it!

    1. One last thing.

      While my ideal is pro-market, I’ll still take pro-business over the pro-regulation/labor, economy-strangling Progressive approach. Because at least you’ll still get higher productivity, higher employment, even more tax revenue for the left, and cool and cheap new stuff for consumers with the crony capitalist approach than with the Progressive one.

      I mean, with that Foxconn factory, the state will still get plenty of revenue from it eventually that will end up exceeding the handouts, whether from the corporate taxes or from new streams of income of those working in it. Not to mention a more gainfully employed populace. And the rest of us will get more affordable and better LCD screens as a result.

      So, again, not ideal. But better than nothing.

    2. GM bailout = government gives taxpayer money to unions who give it democrat politicians
      Solyndra = government gives taxpayer money to ‘green entrepreneurs’ who give it to democrat politicians
      The democrats are only pro-democrat

    3. The title of the opinion piece is wildly misleading.

  7. Broken Windows Fallacy…’nuff said.

  8. It is never good economic policy to punish existing business with more taxes to lure in inchoate ones. It is analogous to the old saying; a bird in the hand is worth two in the bush.

  9. I would like to know who exactly negotiated the deal. Was it Walker and Wisconsin with some input from Trump? The article gives the impression Trump negotiated it.

    Further, what were the mechanics behind it. How can all that political ‘brainpower think’ they were getting something only to be swindled? If this is true, then these people should never negotiate a deal again.

    I need more details.

    Most important is the fact it’s rarely a good idea to hand money out to corporations to relocate. Subsidies, bail outs, tax credits all financial sophistry masking as ‘incentives’ when in reality it’s just circulated tax dollars.

    Here in Canada, we have the same stubborn problem where Bombardier is essentially a ward of the state; a company that without government hand outs would have been out of business probably in the 1990s. Yet, its executives earn millions in bonuses. In Quebec, they spend their energy luring companies all the time. A good example was getting Big Pharma (Merck, Pfizer etc.) to set up on the Trans-Canada highway in Montreal (Highway 40) with all sorts of incentives. 20 years later they’re basically gone.

    And then comes the asshole Justin and his criminal behaviour with SNC-Lavalin all in the claim of ‘saving jobs’. I would like to know what really happened there but if the RCMP won’t do their damn jobs no one will ever know what the crony Liberals were up to there.

  10. Here on the north coast they are talking about building a hyper loop to connect Chicago to Cleveland and eventually Pittsburgh. I’m sure that is going to work out well.

    Sounds cool and sci-fi though.

  11. ” Unfortunately, a slogan like “subsidized projects aren’t worth the money you pay for them” doesn’t make for a great sound bite at ribbon-cutting ceremonies.”

    Does this include renewable energy or is that so important that it doesn’t matter if it costs the tax payers a bundle?

  12. Foxconn’s record of delivering on promises in the U.S. is poor, to say the least. Why cut such a horrible deal with a bunch of con artists, let them skip town, and leave the taxpayers to pay off the bonds? Seriously, there ought to be a way to recover the cash when taxpayers get taken.

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